8/7/2019 What is fiscal deficit

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8/7/2019 What is fiscal deficit

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 What is fiscal deficit?

The difference between total revenue and total expenditure of the government is termed

as fiscal deficit. It is an indication of the total borrowings needed by the government.

While calculating the total revenue, borrowings are not included. Generally fiscal deficittakes place due to either revenue deficit or a major hike in capital expenditure. Capital

expenditure is incurred to create long-term assets such as factories, buildings and other 

development. A deficit is usually financed through borrowing from either the central

bank of the country or raising money from capital markets by issuing different

instruments like treasury bills and bonds.

Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpassesthe revenue generated . It is the difference between the government's total receipts (excludingborrowing) and total expenditure. Fiscal deficit gives the signal to the government about the

total borrowing requirements from all sources.

Components of fiscal deficit

The primary component of fiscal deficit includes revenue deficit and capital expenditure.

Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet thepredicted net amount to be received.

Capital expenditure: It is the fund used by an establishment to produce physical assets likeproperty, equipments or industrial buildings. Capital expenditure is made by the establishment

to consistently maintain the operational activities.

In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called

deficit financing. The fiscal deficit is also financed by obtaining funds from the money market(primarily from banks).

Arguments: Fiscal deficit lead to inflation 

According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitatesnations to escape from economic recession. From another point of view, it is believed that

government need to avoid deficits to maintain a balanced budget policy.

In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal

deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise inthe money stock and a higher money stock eventually heads towards inflation.

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